by Justin J. Long CFP® on Jun 3, 2025 6:33:51 AM
Where We Were
2024 followed through on gains in 2023, driven higher by gradual declines in inflation expectations and gradual increases in employment, consumer spending, corporate earnings, and economic growth. Like 2023, 2024 began with Value, SMID and Foreign markets taking the lead, but overcome once again by US Large Cap Growth.
Revenue and earnings growth in the Growth sectors drove performance again, while investors tried to absorb the fundamental realities of lower asset/higher margin within the Information Technology and Communication Services sectors, lamenting higher P/E ratios all year – while equities climbed even higher. Global equity benchmarks rose between 4% and 25% for the year, with the S&P 500 index taking the pole position once more. Developed Foreign equities gained 4%, Emerging markets 7%. Fixed income benchmarks struggled to stay above water last year, except higher risk, higher yielding benchmarks here at home, and foreign government bonds abroad – which were less constrained by inflation concerns. The US Aggregate Bond index gained just 1% last year, equal to investment grade corporate, mortgage-backed, and national muni bonds. High yield bonds carried the year with a gain of 8%, followed by the international aggregate index, up 5%.
Where We Are
Source: Factset
Testing a return to new highs. The S&P 500 is just 3% off its all-time high of 6144 on 2/19, and up 16% from the closing low, and up 22% from the intraday low on April 7. The Nasdaq 100 has rebounded 23% and 29% from the same day's close and intraday low, and is also 3% from testing its high. Stocks reached extremely oversold levels during the final week of March and the first week of April.
The US Aggregate Bond index is up 2.6% YTD (60/40 is up 1.7%). The 10-year T-Note yield is at 4.40%.
Q1 Results. With 98% of S&P 500 constituents reporting, 63% exceeded revenue estimates, with 5.0% y/y growth vs. the 5.1% forecast at the beginning of Q1. 78% of companies have beaten EPS estimates, with average growth of 13.0% vs. the 11.2% expected. Top beats from Info Tech, Comm Services (GOOG, META, DIS, NFLX), Health Care.
S&P 500 earnings expectations. For 2024, actual EPS was $240/share, up 12% vs. 2023. The 2025 estimate is $263 (+10%), down from $264 last month. The 2026 estimate is $298 vs. $301 (+13%), with 2027 at $337 vs. $338 (+13%). Each of the annual consensus estimates are off <-1% over the past month.
P/E ratios for those estimates are 23x, 20x, and 18x. The P/E-to-Growth (PEG) ratios are 2.3, 1.5 and 1.4. The average EPS growth rate over the past 25 years is 11%; the average P/E and PEG ratios are 21x and 1.9. The consensus price target for the SPX is 6544 vs. 6543 a month ago and 6908 sixty days ago, for an implied total return of +11% from its current level.
Where We’re Headed
Remember not to get stuck fighting the last war with regard to international, and look behind the curtain. International (non-US) stocks are outperforming this year. In some investors’ minds, this is a reason to consider adding more to foreign equity exposure than they already have. If that is the case, it is important to be well informed about the makeup of stock exposures within benchmark index, as well as individual stock models.
If a portfolio is benchmarked against the total US market, the Russell 3000 benchmark is comprised of approximately 70% large cap, 20% mid cap, 10% small cap – and its revenue exposure outside the US is 40%. The S&P 500 is 85% large cap, 15% mid cap, 0% small cap – and has 40% non-US revenue exposure. What about foreign equity indexes? The MSCI All-Country World Index – ex US (ACWX), a common global equity benchmark, is 90% large cap, 10% mid cap, 0% small cap, and has 80% non-US revenue exposure, yet also gets 20% from America. So what’s the point? The point is that the great US-based companies folks already own indirectly through index mutual fund or ETF holdings are already diversifying outside the United States by over 40%, and if someone added to their allocation of foreign stocks via one of the most popular international equity ETFs (e.g. ACWX), they would be buying back into US exposure with 20% of that allocation.
And what about for individual stock models? Our Core Growth model’s foreign revenue exposure 47%. Growth & Income is 44%. Dividend Achievers is 37%. And be careful about what portfolio analysis software tells you. Many will state that these portfolios are 100% US, simply because the company HQ is here. And for those looking for a larger stake in Western Europe in particular, take note that its exposure in the three models is 17%, 14% and 14%, respectively. Incidentally, the exposure to Europe in the All-Country World Index (ACWI) is also 14% - so if the models are used “as directed”, portfolio exposures should be in line with the global benchmark.
Longer-term, it’s important to understand the dynamics between foreign and US companies. One of the important factors is earnings growth, which was highlighted in the Wall Street Journal a couple weeks ago ("Ditch-America Trade", B1), and is reflected below in the right-hand chart. If shares of companies reflect their underlying fundamentals over time, that chart tells the story of why the US has so consistently outperformed its foreign counterparts. Even though this year's performance is better than the US so far, US-based companies still retain a large earnings growth advantage. The left-hand chart below summarizes the US performance advantage over the past 20 years; with the exception of once every couple or handful of years, the US has proven preferrable.
Estimates have stabilized since tariff concerns have eased. Since November’s election and the initiation of new punitive tariff rates and negotiations, 2025 revenue estimates for S&P 500 companies have declined by (3.7%). As compared to that 6-month change, the revenue estimate over the past 3 months is off (2.7%). And over the past 30 days, the estimate is essentially flat at (0.2%), a period which includes the recalibration of analyst expectations following Q1 2025 results – and with the past four months of tariff changes factored in.
Sales estimates for the Information Technology sector are up over the past month, albeit by 0.1%. Over the past 12 months, both sales and EPS estimates are higher. Similar conditions are now to behold in the Health Care, Utilities, Materials, and Real Estate sectors. So much like it seemed last month, there has been a broad reversal toward stabilization at worst, and a return to rising estimates at best. Not surprisingly, a rebound in market values has mirrored better-than-anticipated Q1 earnings results, and forward-looking analyst sentiment.
For the pensive and anxious, may we suggest considering the outlook of our real estate friends. Market prices tend to be discounting mechanisms of future expectations. But because company stock prices are “valued” minute by minute and prone to so many different participants, with varying motives and objectives, many “investors” tend to look myopically at the near term, at the expense of longer-term trends.
This is when its helpful to draw lessons from traditional real estate investors. Real estate folk tend to look at properties as hard (tangible) assets, which will rise in value from secular demographic demand, rental income, or both. Therefore, downturns tend not to fluster real estate folks as much; they remind themselves of long-term value and inflation-adjusted rental income possibilities, based on their own life experience and the rise in values over time. And they’re generally not wrong.
For some reason however, investors who own shares in companies often do not share this outlook. They get caught up in the day-to-day news and valuation cycle and let that become their investment reality. They somehow don’t place the same long-term value on Microsoft, Costco, Home Depot and Amazon, even though they use Outlook, Word and Excel every day, load up their carts with groceries (and a bunch of other stuff) every week, hit the orange-branded store six times for each “20 minute project”, and keep delivery drivers busy with regular 1-click, 2-day orders. And virtually everyone they know does the same.
And they also overlook the power of Adam Smith’s Invisible Hand. When investors own shares in Microsoft, they have 228,000 employees indirectly working for them - trying to increase the value of their company, and therefore the stock. The same goes for the 333,000 working at Costco. The 470,000 at Home Depot. The 1.6 million at Amazon. Over the past ten years, sales at Microsoft have increased from $90 billion to an estimated $300 billion this year, while operating cash flow has increased from $31 billion to $140 billion, and dividends from $1.17 to $3.33. In addition to the growth in cash dividends paid shareholders over the past decade, the value of MSFT shares has increased by over 800%, while the Nasdaq has gained over 400% and the S&P 500 240%.
The takeaway here is to help folks focus more on the long-term merits and possibilities of the world’s great companies within funds, stocks and portfolios than near-term volatility unfortunately inherent in the system itself. Second-by-second trading of shares, and the “valuation” implied by tick marks, should not disabuse a truly long- term investor from a mindset which instead anticipates positive compounding effects of global population growth, strong competitive positions, motivated employees, new innovations, and a very long term track record of many more up years than down. To do so brings owners of companies more in line with owners of properties, who tend to fare far better over extended periods with regard to perspective, performance and mental health.
